The United States Bankruptcy Code prohibits an employer from taking adverse action against an existing employee because of a bankruptcy filing.

In December, the United States Court of Appeals for the Third Circuit refused to extend that same protection to applicants for employment. In Rea v. Federated Investors, the court ruled that the phrase "discrimination with respect to employment" in section 525(b) of the Bankruptcy Code was not broad enough to encompass discrimination in the denial of employment, and concluded that an employer may refuse to hire a job applicant based on a prior bankruptcy filing. Thus, the court upheld the dismissal of the plaintiff's case on a motion to dismiss for failure to state a claim.

Despite this ruling, employers should be wary of using prior bankruptcy filings, and more generally credit reports, when making employment decisions, as several U.S. states have laws strictly limiting the use of such information. Also, the EEOC recently filed a nationwide hiring discrimination lawsuit asserting that an employer's use of job applicants' credit histories discriminated against applicants on the basis of race under the disparate impact theory of employment discrimination under Title VII. EEOC v. Kaplan Higher Education, Inc., No. 1:10-cv-02882 (N.D. Ohio), filed December 21, 2010. In the past, the EEOC expressed its position that unless a credit history is strongly related to the position at issue (e.g., a position in which the employee is charged with handling cash), use of credit histories may be discriminatory, resulting in liability, even if the discrimination was unintentional.

Thus, employers should review their hiring policies to the extent they use credit checks, and should consult with employment counsel as necessary.

The U.S. Supreme Court held that a public employer’s review of transcripts of an employee’s text messages on an employer-issued pager constituted a reasonable search under the Fourth Amendment of the United States Constitution. City of Ontario, Calif. v. Quon, No. 08-1332 (June 17, 2010). Although the case involved a public employer, it has some important lessons for private sector employers as well.

Factual Background

Quon worked for the City of Ontario, California, as a police sergeant and as a member of its SWAT team. In 2001, the police department issued pagers to its SWAT team members to help them mobilize and respond to emergency situations. The City’s contract with its wireless service provider had a monthly character limit for each pager, and the City required officers to reimburse it for the additional fees incurred for monthly usage over that limit. When the reimbursement process became burdensome, the City reviewed the communications to determine if the existing character limit was too low for work-related purposes or if the overages were for personal messages.

An initial review showed that several officers had used their pagers for extensive personal text messaging. For instance, many messages sent and received on Quon’s pager were personal in nature, and several were sexually explicit. This prompted the Police Department’s Internal Affairs Division to investigate whether Quon had violated department rules by pursuing personal matters while on duty. The investigation concluded that he had done so, noting for instance that of the 28 messages Quon averaged per shift, only three were work-related.

The City had a “Computer Usage, Internet and E-mail Policy” that permitted incidental, personal use of City-owned computers and equipment. The policy warned employees that personal communications could be monitored, and that employees had no expectation of privacy in such communications. Although the policy did not mention text messages, the City made clear to employees that such messages would be treated like e-mails. The police lieutenant responsible for the City’s wireless contract, however, told Quon that “it was not his intent to audit [an] employee’s text messages to see if the overage [was] due to work related transmissions.” Quon interpreted that comment to mean that the City would not examine the content of his text messages.

Recently, in Stengart v. Loving Care Agency, the New Jersey Supreme Court held that an employee had a reasonable expectation of privacy in her Internet-based emails to her lawyer, despite the fact that she sent such emails from a company-owned laptop and was on notice of the employer’s written policy that emails may not be considered “private or personal.” The opinion is significant not only in recognizing a privacy interest for employees’ communications to their attorneys using company-owned-and-monitored networks, but also in providing important guidelines for employers drafting or updating their policies on use of email and the Internet. In addition, Stengart issues a warning to both in-house and outside counsel involved in the forensic review of employees’ computer-based data and communications.

In a unanimous ruling by a three-judge panel on June 18, 2008, the Ninth Circuit Court of Appeals in Quon v. Arch Wireless Operating Co., Inc. et al., 2008 U.S. App. LEXIS 12766, held: (1) that a third party vendor provided an electronic communication service to the subscriber/employer and that it violated the Stored Communications Act (SCA) when it turned over text-messaging transcripts to its subscriber, who was not an addressee or intended recipient of the messages; and (2) that an employer’s search of the text-messaging transcripts violated the Fourth Amendment because employees have a reasonable expectation of privacy in those messages.

Facts — A police sergeant (employee) filed a lawsuit against the city, the police department (employer) and the city’s provider of wireless text messaging services for violations of the SCA and the Fourth Amendment prohibition against unreasonable search and seizure. The employer had a computer usage, internet and e-mail policy that entitled it to monitor all network activity without notice and stated that users had no expectation of privacy or confidentiality and that use of computers for personal benefit was a violation of the policy. The employee signed an acknowledgment of the policy and attended a meeting in which it was stated that the policy applied to the use of pagers. The employee was issued a pager by his employer, which was governed by the policy. He used the pager for both work and personal messages, including sexually explicit messages to his wife. He exceeded the department’s informal policy limiting use of the pagers to 25,000 characters. The “operational reality” was that the department would not audit their employees’ pagers as long as the employees agreed to pay for any overages. The employee paid the overages on the three to four occasions he exceeded the character limit. The police chief ordered that the transcripts of the employee’s text messages be obtained and reviewed to determine whether the pagers were being used for purely work purposes. The provider, Arch Wireless, produced the transcripts to its subscriber, the employer.

The Decision — The Ninth Circuit held that the provider provided a service that enabled the employee to send or receive electronic communications under the plain meaning of the SCA and therefore violated the SCA. The court ruled against the police department, stating that its informal policy of requesting a check for any overages created an expectation of privacy in the text messages. The search of the text messages was unreasonable in scope and therefore in violation of the Fourth Amendment because there were a host of simple ways to verify the efficacy of the 25,000 limit without intruding on the employee’s constitutional rights.

Practical Impact — This is the first time a federal appellate court has provided Fourth Amendment protection to electronic messages. The ruling gives government workers Fourth Amendment protection against searches of text and e-mail messages by their employers. Government employer subscribers will now have to obtain a warrant, court order or consent before their outside vendors will permit access to email and text messages. The SCA portion of the decision may encourage employers to maintain archived email and text messages on their own internal servers, rather than hiring third-party vendors, so they can control access to them. The decision should also remind employers that they should implement strong internet and computer usage policies. However, even if they have strong policies that allow monitoring of all network activity without notice, that expressly state that users have no expectation of privacy or confidentiality and that use of computers for personal benefit violates the policy, they need to to regularly monitor employee email and text messages. The Quon case makes it clear that an employer’s statement that it has the right to monitor is not sufficient if, in practice, employees are lead to believe they have an expectation of privacy in their personal communications. In addition, the opinion highlights the need for employers to thoroughly train supervisors who are responsible for ensuring employee compliance with computer and internet policies and to evaluate their performance of these duties on a regular basis to avoid a custom or “operational reality” which supercedes the written policies.

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